Bigger, fewer dealerships likely will be way of future for changing auto industry

Automobile dealerships in the Capital Region are changing. Over the past year, old showrooms have been remodeled and new ones built, while dealers have added product lines and expanded inventories of new and used vehicles. And more is in the works.

"In the next five years, we'll see more change than in the previous 30 years," said Donald Metzner, president of the Armory Automotive Family in Albany.

Industry observers, noting similar dynamics nationwide, cite the reinvigorated rivalry among America's Big 3 automakers and the threat of used-car superdealerships as inspiration for the trend, but local dealers beg to differ. They point instead to a variety of forces at work, some glacial in both their pace and their importance.

No local dealer was ready to discount the potential threat of CarMax: The Auto Superstore and its ilk, but none reported losing sleep over them. The massive used-car dealerships, some with inventories of more than 1,000 units, have not arrived yet in the Northeast and, nationally, they haven't proven economically successful.

Circuit City, parent of CarMax, reported that the chain lost $7 million on sales of $304.5 million for the fiscal year that ended in February. It expects to post similar results this year and to turn a profit in fiscal 1998, said spokesman David MacMillan.

As the nation's largest retailer of brand-name consumer electronics, Richmond, Va.-based Circuit City Stores Inc. has the deep pockets necessary to continue its ambitious plans for CarMax, which include at least 80 locations in 45 of the top 50 advertising markets in the country by 2001. MacMillan declined to state whether Circuit City plans to build a CarMax in the Capital Region.

Even if it doesn't, the region need not go without. H. Wayne Huizenga, who built Blockbuster Entertainment Corp.--the video giant--has announced that his Republic Industries Inc. intends to buy the CarChoice used-car chain, in addition to its AutoNation USA dealerships. Grand Rapids, Mich.-based Driver's Mart also has announced plans to have 100 outlets within three to five years.

It is unclear how far these chains or local dealerships will be willing to go to gain or hold onto a share of the $200 billion U.S. used-car market.

CarMax has staked its claims armed with huge selections, a no-haggle policy, competitive prices and a quality guarantee. It also uses a computer system to help customers find the vehicle they want, and provides play areas for children and food courts in its stores.

The used-car business is a refreshing growth area for dealers accustomed to the fierce competition of the new-car market, said Chris Mackey, vice president of Latham-based New Country Motor Car Group Inc., the Capital Region's largest dealer group.

Significant increases in leasing over the last few years have brought large numbers of well-maintained, relatively new, low-mileage cars to market, Mackey said. This wave of high-quality used cars has raised customer confidence in used vehicles.

Dealers are responding to this enthusiastically, in part because used-car sales provide a significant opportunity for profit, Mackey said. No two used cars are quite alike, so price-comparison shopping is almost impossible, eliminating the risk of undercutting and preserving profit margin, he said.

"Used cars have dramatically increased in importance to the new-car dealer," Mackey said. Some dealers now reap as much as 40 percent of gross profits from used-car sales and related business, he said.

While the jury is still out on how the new competition--should it arrive--will affect Capital Region dealers, the dealers are far from idle. Metzner reports that Armory is doubling its used-car business, including staff and inventory, and building new customer-service facilities.

CarMax also is not worlds ahead of the competition in its use of computer technology. Locally, a handful of dealers have established information sites on the World Wide Web. The manufacturers have done likewise, and Chrysler has located Plymouth Place information services in 60 cities nationwide.

A Plymouth Place has been set up in Crossgates Mall in Guilderland, where it will remain through Oct. 31. In addition, services have sprung up across the country to offer dealerships computer-kiosk information systems for their showrooms.

This meshes well with a trend among customers several dealers mentioned. Some car shoppers do extensive research on the Internet, looking at models offered, features, technical specifications, and even what dealers pay for cars.

They go to the dealership when they're ready for a test drive and to talk price, Metzner said. To meet these customers' needs, Armory can provide information or arrange service appointments by electronic mail.

But while the busy car shopper or the Internet surfer may find Plymouth Place or the World Wide Web handy sources of information, when it comes time to invest in a car, only a helpful human presence will do, said Terry Morris, president of the Burnt Hills-based Morris Car Group.

"There's nothing like a friendly, family environment," Morris said. Customers today are looking for high-quality, personal service, he said.

Changes now occurring are doing to the car business what stores like Barnes & Noble and Borders did to book selling, introducing new standards of service, selection and convenience, Metzner said.

As part of its move in this direction, Armory is building a 25,000 square foot addition for customer service, including a car wash, a sales area for parts and accessories, a quick oil-change facility, and a lounge with places to plug in laptop computers, plus the ubiquitous television.

"The future belongs to those who take care of the customer the best," Metzner said. To provide stand-out service in the future, Armory might take steps such as keeping its service department open 24 hours, he said.

The epitome of one-stop shopping convenience in the Capital Region is New Country's "auto park" in Saratoga Springs that offers eight domestic and foreign makes in one dealership complex.

Having a wide variety of makes available at one location allows customers to compare features and prices without driving all over town, said Mackey, New Country's vice president. What's more, they don't have to introduce themselves and explain their needs over and over; one sales representative can walk with them as they look at the different brands.

A single, consolidated location also reduces redundant expenses for the dealer, such as management costs and telephone equipment, so the dealer can charge a little less, Mackey said. "It's a win-win situation for the consumer," he said.

Are multi-dealer sales centers the wave of the future? Mackey said he doesn't know, but one thing is for sure: "The future holds changes a lot more dramatic than the clustering of dealerships."

One of the forces behind those changes is likely to be the capital-intensive nature of the automobile business. Not only is the initial investment to set up a dealership large, but the day-to-day business of acquiring and delivering cars pivots on money borrowed and money promised.

New cars on the dealer's lot typically are owned by a lender, who must be paid as soon as a car is sold and delivered. Because the customer's finance company can take days to produce a check, the dealer ends up paying the lender, tying up money "in transit," Mackey said. In part, this is an effect of the long-term rise in car prices, which has led about 70 percent of customers to lease or finance their cars.

More is tied up in used-car inventory--$500,000 at the average dealership--parts and other supplies. And increasingly, dealers pay the manufacturer for brochures, special tools and other materials that once were provided free, a trend that Morris--the Burnt Hills auto group owner--said began more than a decade ago.

In light of these pressures, the days of the mom-and-pop dealership are limited, Mackey said. Family businesses already in place may go on, but nearly all new dealerships will be affiliated with auto groups, he said. He predicts that publicly held dealerships will follow.

Morris said he thinks it would be impossible for an entrepreneur today to get into the business the way he did in 1972, when he bought the Ford-Mercury dealership where he had begun working in 1960.

Armory's Metzner isn't convinced. The car business always has been capital intensive, and banks are ever willing to lend to entrepreneurs who have what it takes to succeed, he argued. An entrepreneur probably won't be able to buy a turnkey dealership or start a big operation from scratch, he said. But someone who is devoted to the business will be able to find a niche in which he or she can succeed, much the way specialty grocers can flourish in the age of supermarkets.

Another threat to the family dealership is manufacturers' policies and cost-cutting measures. As the car companies have shifted the costs of tools and product literature to their dealers, they also have re-examined their dealership structures. Both Chrysler Corp. and General Motors Corp. plan to have fewer dealerships in the future, especially in regions where affiliates end up competing against one another.

In addition, manufacturers want to get the most out of their factory representatives, Morris said. If it costs the same amount to send a representative to a small dealership or to a large one, then proportionally, it costs more to take care of the small dealer, he said.

He predicted that manufacturers will try to force small dealers either to increase volume--perhaps to 300 or 400 new cars per year--or close.

Metzner concurred. "It's my belief that over the next 10 years, you'll see far fewer dealerships, but bigger [ones]," he said.

"In the future, you're going to drive farther to buy your car. And the dealer who sells less than 20 cars a month, I see down the road he'll be nonexistent," Morris said.